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FY 2007 State & Local Tax Collections: $7.9 Billion High reliance on general sales taxes Low reliance on property taxes High reliance on severance taxes About half of selective sales taxes are road fund revenues. N.M. Tax Research Institute2

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FY 2007 Tax Revenue Distributions: $7.9 Billion Just over half of all tax revenue goes to the state’s General Fund Local governments receive about one-third of all tax collections. N.M. Tax Research Institute3

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How Do New Mexico’s Business Taxes Compare? Source: “Total state and local business taxes,” Ernst & Young, Council on State Taxation, January 2009. N.M. Tax Research Institute5

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General Fund “Own-Source” Revenue: FY 2008 Total $6.0 Billion State revenues are well balanced, though O&G share is at historic high About 1/3 from non-tax revenues – O&G and Permanent Fund earnings N.M. Tax Research Institute6

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7 After the October revisions, the long-term growth rate of general fund revenues is 5.4% Source: LFC – Oct consensus revenue forecast

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General Fund Revenue Sources – Gross Receipts and Compensating Tax – Cont’d Compensating tax – Imposed on the value of property manufactured in the state by the person using it acquired outside NM that would have been subject to the GRT had it been acquired in NM that becomes taxable because of subsequent use of the property or service (i.e. using something acquired for resale) – Rate = 5% – Credit for tax (sales) paid to other state up to 5% – Exemptions and Deduction mirror GRT where applicable – Doesn’t apply to individuals Interstate commerce issue – some sales not taxed – Also funds small cities and counties assistance funds N.M. Tax Research Institute12

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New Mexico is forecasting a milder downturn than the U.S. Federal decline in 2002 – 2005 partly due to law changes NM growth from 2004 – 2009 slowed by rate changes. N.M. Tax Research Institute17

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General Fund Revenue Sources – Personal Income Tax – Cont’d Graduated rates that range from 1.7% to 4.9%. Tax credits and rebates may reduce tax due. Most credits are nonrefundable (but may be carried forward) Refundable rebates and credits (except the Working Families Tax Credit) are based on “Modified Gross Income” (MGI). Withholding and estimated payments are applied. Taxpayers compute their tax due or refund. N.M. Tax Research Institute18

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General Fund Revenue Sources – Personal Income Tax – Cont’d Recent Changes – Rates reduced over six years (2003 -2008) Prior rate brackets ranged from top bracket at 8.2% – Credits Created and Expanded Low/middle income Health and provider Conservation/alternative energy production – Head of Household eliminated – Capital Gains – Expanded Preferential Treatment Current deduction of 50% of gains (was phased in in 10% increments 2003-07) Prior law provided only $1000 exclusion rather than current “greater of” N.M. Tax Research Institute19

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General Fund Revenue Sources – Corporate Income Tax Entities Subject to Tax – Corporations – Other entities taxed as corporations under federal income tax Certain partnerships, LLCs, Subchapter S corporations, trusts Nexus – To be subject to tax by New Mexico, entity must: Be employed or engaged in the transaction of business in, into or from New Mexico, or Derive any income from any property or employment within New Mexico N.M. Tax Research Institute20

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General Fund Revenue Sources – Corporate Income Tax – Cont’d Taxable Income – Taxable income as defined for federal income tax purposes, with certain additions and subtractions – Additions: Interest on non-New Mexico state and local bonds Federal NOLs ( 3 year carryback, 20 year carryforward) – Subtractions: Interest on federal bonds and New Mexico state and local bonds subject to federal income tax State NOLs (no carryback, 5 year carryforward) Dividends from foreign corporations (including “gross-up”; percentage based on ownership) N.M. Tax Research Institute21

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General Fund Revenue Sources – Corporate Income Tax – Cont’d Allocation and Apportionment – Corporations with income from outside New Mexico must allocate and apportion their income to New Mexico – NM follows Uniform Division of Income for Tax Purposes Act (UDITPA) – “Non-business” income is “allocated” to one state (source state) – “Business income” is “apportioned” between states by formula – Apportionment formula uses 3- “factors” - property, payroll, and sales – Each factor is the percentage of the New Mexico amount to the “everywhere” amount, and the three percentages are then added and divided by 3 to get the average apportionment percentage – Manufacturers can elect to use a 4-factor formula that double weights the sales factor under certain narrow circumstances (which may benefit a manufacturer who locates here but sells outside the state) N.M. Tax Research Institute23

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General Fund Revenue Sources – Corporate Income Tax – Cont’d Tax Liability Corporate income tax is imposed at three rates: – 4.8% for net income of $500,000 or less; – 6.4% of net income between $500,000 and $1,000,000; and – 7.6% of net income over $1,000,000 – New Mexico has the 21 st highest top corporate income tax rate and the highest of surrounding states In NM, rates are applied to the taxpayer’s unapportioned income, and that tax is then prorated based on the taxpayer’s apportion/allocation percentage Credits reduce tax liability Corporate franchise tax also applies - $50 per year per corporation N.M. Tax Research Institute24

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Oil and Gas Taxes Tax rates – Oil N.M. Tax Research Institute27 Taxes on Oil Net Price of Oil ($/bbl) Under $15$15 to $18Over $18 Oil and Gas Emergency SchoolTax 1 1.58%2.36%3.15% Oil and Gas Severance Tax 2 1.88%2.81%3.75% Subtotal3.46%5.17%6.90% Oil and Gas Conservation Tax0.19% Production Ad Valorem Tax1.04% Production Equipment Ad Valorem Tax 0.14% Total4.83%6.54%8.27% (1) 2.36% for stripper wells if taxable value of oil is between $15 and $18/barrel; 1.58% if less than $15/barrel. (2) 2.81% from stripper wells if taxable value of oil is between $15 and $18/barrel; 2.45% removed from well workover projects if average annual price of WTI is less than $24/barrel; 1.88% if WTI less than $15/barrel. Note: Deductions allowed for state, federal and Indian royalties and trucking expenses - In FY 2008, for oil averaged10.21%.

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Oil and Gas Taxes Tax rates – Natural Gas N.M. Tax Research Institute28 (1) 3% for stripper wells if taxable value is between $1.15 and $1.35/mcf; 2% if average annual price of WTI is less than $24/barrel. (2) 2.81% for stripper wells if taxable value is between $1.15 and $1.35/mcf; 2.45% if average annual price of WTI is less than $24/barrel; 1.88% if taxable value is less than $1.15. Note: Deductions allowed for state, federal and Indian royalties and trucking expenses - In FY 2008, for natural gas averaged19.18%. Taxes on Natural Gas Net Price of Natural Gas ($/mcf) Under $1.15$1.15 to $1.35 Over $1.35 Oil and Gas Emergency School Tax 1 2.00%3.00%4.00% Oil and Gas Severance Tax 2 1.88%2.81%3.75% Subtotal3.88%5.81%7.75% Oil and Gas Conservation Tax0.19% Production Ad Valorem Tax0.88% Production Equipment Ad Valorem Tax 0.15% Total5.10%7.03%8.97%

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Selective Sales Taxes – Tobacco Tobacco Taxes – Cigarette $0.91 per pack of 20 cigarettes Tax raised from $21 per pack of 20 on July 1, 2003 Requires stamps Exemptions – U.S. or any agency thereof – governing body or enrolled member of any tribe for sale or use on that tribe or pueblo – sales prohibited by N.M. or U.S. constitution – Tobacco Products Tax (snuff, cigars, etc.) 25% of product value Exemptions – Products sold to or by the U.S. or N.M., or any of their agents or instrumentalities Deductions – Interstate sales N.M. Tax Research Institute30

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Selective Sales Taxes - Gaming Gaming Taxes – Gaming Tax Administered by the Gaming Control Board 10% of receipts from sale or lease or other transfer of gamine devices – Exception for transfer from manufacturers to distributors 10% of the net take of a gaming operator that is a not-for-profit 26% of the net take of other gaming operators In lieu of other state and local gross receipts taxes – Gaming operator that is a racetrack Administered by the Racing Commission 26% of net take to purses (in addition to gaming tax) N.M. Tax Research Institute34

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NMTRI Principles of Good Tax Policy N.M. Tax Research Institute is a non-profit, non-partisan member-supported organization dedicated to advancing the following principles of good tax policy in New Mexico: Adequacy – Revenues should be sufficient to fund needed services Efficiency – Interference with the private economy should be minimized Equity – Taxpayers should be treated fairly Simplicity – Laws, regulations, forms and procedures should be as simple as possible Comprehensiveness – All taxes should be considered when evaluating the system Accountability – Exceptions should be rare and should be carefully evaluated and justified N.M. Tax Research Institute35